A precedent setting new development in San Jose last week provides abundant evidence of just how powerful local government unions really are in California. As reported today in San Jose Inside and elsewhere, an embattled city council has tentatively approved a new contract with San Jose’s police union that awards them “a 5 percent ‘retention’ bonus and an 8 percent raise over the next 16 months. In addition, former officers who return to the force in the next year can claim a 5 percent signing bonus.”

More significantly, at the same time, the San Jose City Council has tentatively agreed to drop their appeal of a court ruling that overturned a key part of a San Jose pension reform, a reexamination of the so-called “California Rule.” As pension expert Ed Mendel reported yesterday in PublicCEO, “The “California rule” is a series of state court decisions widely believed to mean that the pension offered on the date of hire becomes a vested right, protected by contract law, that can only be cut if offset by a new benefit of comparable value.”

In practical terms, this means that pension benefit formulas, according to the California Rule, cannot even be trimmed for future work performed by existing employees. San Jose’s pension reform Measure B, passed by 70% of voters in 2012, presented city employees with a choice – they could either contribute an additional 16% towards their pension benefits via payroll withholding, or they could accept lower pension benefit accruals from then on. Nothing they had earned to-date would have been taken away from them.

Despite legal opinions that claim the California Rule is not well established law, and despite that the California Rule is contrary to the law governing public sector pensions in most states, and contrary to all law governing private sector pensions everywhere, San Jose’s local elected officials have capitulated.

THE INHERENT HYPOCRISY OF THE ‘CALIFORNIA RULE’

It is difficult to overstate just how hypocritical the union’s position is on the issue of modifying pension benefit formulas. Because the problems with pensions began back in 1999, when SB 400 raised pension benefit accruals per year for the California Highway Patrol. Within a few years, most every agency in California followed suit. And these pension benefit enhancements were applied retroactively to the date of the employees’ hire.

That is, starting in 1999, agencies changed the pension benefit formula so that, for example, police and fire pension accruals were not just increasing from 2% to 3% per year from then on, but retroactively to the day each employee was hired. So someone who would have earned a pension equivalent to 2% of their final salary times the years they worked would now earn a pension equivalent to 3% of their salary times the years they worked, even if they were going to retire within the next year or two.

What San Jose Measure B tried to do was not roll back pension benefits from 3% per year to 2% per year for years already worked. It only tried to reduce the benefit accrual, prospectively, for years still to be worked. And even that was too much for these unions.

THE DEVASTATING COSTS OF SAN JOSE’S POLICE/FIRE RETIREMENT BENEFITS

If taxpayers could afford to pay these pension benefits, there might be a stronger argument to preserve them. But San Jose’s independent Police and Fire Department Retirement Plan, according to their most recent financial report, is not in great shape financially. Keeping it afloat requires staggering sums of money from taxpayers that are only going to increase each year. Here are highlights:

(1) The plan as of 6-30-2014 (most recent data available) was 77.5% funded (page 114). This means that instead of earning their officially projected annual return on investment of 7.125% per year, just to avoid becoming more underfunded, they will have to earn 9.2% per year. Just to stay even. That is their so-called “risk free” rate of return.

(2) The fund truly is “risk free” to participants, because the taxpayers pay most of the expense and cover the losses when the market fails. In FYE 6-30-2014, police and fire employees contributed $21.1 million into their retirement fund, and taxpayers (the City of San Jose) contributed $123.6 million (page 69), nearly six times as much. How many “six to one” matching contributions are out there for corporate 401K plans?

(3) The unfunded liability for the SJ Police and Fire Retirement Plan was $806 million (page 114) as of 6-30-2013 (most recent actuarial data), equal to 436% of payroll. Or looking at this another way, the city’s pension contribution was $123.6 million, whereas their “covered payroll” was $184.6 million. That is, for every dollar San Jose pays to put police and firefighters on the street, they have to pay 67 cents to the pension fund.

(4) It’s not just pensions. The SJ Police and Fire Retirement Plan includes city funded retirement health insurance benefits. How’s that fund doing? As of 6-30-2013 (most recent data), that plan was 11% (eleven percent) funded, with an unfunded liability of $625.5 million (page 65).

(5) If you consolidate the financial data for San Jose’s Police and Fire Retirement Plan’s pension and healthcare (OPEB) plans, the most recent statements indicate they are 67% funded, with a total unfunded liability of $1.4 billion. If San Jose were to responsibly reduce their total unfunded liability for public safety retirement benefits, they would be paying far more than 67 cents for every dollar of payroll.

THE MISLEADING EMPHASIS ON AN EXODUS OF OFFICERS

Throughout this battle between fiscal realists and the police union in San Jose, the police have maintained that officers were leaving the city to work elsewhere or to retire. There’s no question that their ranks have thinned, perhaps alarmingly. According to SJ Inside, “the agency [currently has] 943 sworn officers out of a budgeted 1,109 positions.” And historically San Jose’s police department has had as many as 1,400 officers. But is the union thwarting efforts to fill the ranks?

“On the first day of the academy, our orientation included the opportunity to meet Jim Unland, the Police Officers Association’s president. In no uncertain terms, he blamed Measure B for the departure of hundreds of officers — and he told us that it would be better for the department and for us if we would just quit, right then and there. He said that our employment with the department did not help the POA’s cause in proving Measure B was killing the department’s recruitment capabilities. He urged us to find jobs elsewhere.”

Reached for comment earlier today regarding developments in San Jose, former Mayor Chuck Reed agreed with the substance of these allegations. Not only did he confirm reports of union representatives discouraging academy recruits from taking jobs with the department, but he also described other ways they thwarted recruitment:

“There were reports of recruiting events held in the San Jose police union offices where they invited police recruiters in from other cities to encourage active San Jose police officers to take these jobs in other cities.”

Reed also said “when we were trying to hire officers, we wanted to bring in retired police officers in to do the background checks so we could keep our active officers on the beat – but the union urged retirees to refuse to accept the work.”

In any case, Reed pointed out that the city had determined to reduce the size of the police force back in 2010, well before voters approved Measure B, saying “the police department headcount went down from 1,400 to 1,100 before there was any pension reform.” Reed believes that an ideal headcount for the San Jose police department would not require returning to 1,400, and that getting to the budgeted 1,109 positions would be a good first step.

SO HOW MUCH DO SAN JOSE’S ‘UNDERPAID’ POLICE OFFICERS MAKE?

Getting timely and accurate information on public pay is difficult because financial reports from public entities take a long time to produce and often omit important data. The most recent payroll records publicly available for the city of San Jose are for 2013. According to a search on Transparent California of San Jose city employees with “Police” in their job title, in 2013 there were 260 of them who made over $250,000 in pay and benefits, and an astonishing 806 who made over $200,000 in pay and benefits. Here’s the link: San Jose city employees, 2013, with “Police” in their job title.

Are San Jose’s police officers underpaid? The average veteran officer makes pay and benefits worth well over $200,000 per year. Add to that the likely 5% “retention bonus, and the 8% raise over the next sixteen months per the tentative new agreement. You decide.

The personal attacks and confrontational tactics employed by the San Jose police officers union against their political opponents do not reflect well on the fine men and women who staff that department, who perform work of vital importance to society. Whether or not they intentionally urged officers to quit (or never join) the San Jose police force is almost irrelevant, despite abundant evidence that suggests they did. Because their real transgression against the people of San Jose, the taxpayers, the elected officials, and public safety itself, is to insist on levels of pay and benefits for their officers that are far more than the city can afford.

This is a zero sum game. If wages plus benefits are not comparable to nearby cities officers will leave. Some will hire on to get their foot in the police door get training and experience and head out for greener pastures. No surprise here

One problem, you can have an employment contract and force the employee who takes paid training and quits to pay the $$$ back, that person is also a fraud, and a person who should not be in law enforcement or anywhere else in a position of authority.

The bottom line is that the outcome of Chuck Reed’s San Jose pension reform adventure is that what is now being implemented by the city and its unions is something the unions say they would have agreed to in the first place if brought to the negotiation table. The Reed initiative proved to be a disaster, eroding the public safety of San Jose’s citizens as police coverage dropped, the city wound up spending millions on legal fees and here we are with reason finally prevailing as a new slate of city leaders seeks to provide a decent level of service to its citizens. Reed succeeded in getting personal political visibility out of it all, and blog writers got a couple years to write about San Jose pension reform efforts and issues. In spite of being an attorney it appears that Reed and his supporters are amateurs when it comes to compensation and constitutional law and writing initiatives. The effort by Reed and his supporters now under way to get a state-wide reform initiative on the ballot is a mess – from a complete section of the initiative being blank to misrepresenting what it would do to current public sector employees. Another Reed folly. See Dan Borenstein’s column at http://www.contracostatimes.com/daniel-borenstein/ci_28661313/daniel-borenstein-attorney-general-kamala-harris-is-right. Lastly, the comments in this article about personal attacks is laughable because the author has engaged in the same practice, such as discrediting the opinion of people receiving public sector pensions, especially if they are members of the so-called $100,000 club. What’s next – suggesting that they should not be allowed to vote either?

The title of professor Monahan’s article about “The California Rule” is/was “Statutes as Contracts? The “California Rule” and its Impact on Public Pension Reform, 97 Iowa Law Review 1029 (2012).”

My point: Her analysis clarifies the “The Californis Rule” applies where there was/is a statute that has been interpreted by a court to grant employee’s a vested pension right. Kern v. City of Long Beach makes that requirement clear to a lawyer(Ca. Supreme court).

The citation to Ed Mendel’s description of the California Rule is typical of the mis-description of the rule. It is a true statement of the rule, if and only if the court has found that a statute had created a vested pension right. The court was describing “when the vested right vests?” It had earlier found that a charter provision had created a vested pension right. As Prof. Monahan pointed out, when the right vested was really important, ,because if it only ve4sted upon retirement, it could be repealed until then.

There are as many legal opinions as there are lawyers, but the only opinions that count are those rendered by the judges of our courts. They have consistently upheld the “California Rule,” regardless of what Mr. Moore or others may like. That’s a good thing.

Why do you think professor Monahan entitled her article “Statutes as Contracts?” The Ca. Rule requires a statute that a court can interpret as granting a “vested pension right.” There are numerous cases where the courts have found a lack of legislative(statutory) intent and therefore no vested right.

I assume these police officers won’t mind paying their kids’ tuition at the University of Calif. of $4500 per quarter. UC has a very big pension bill, too. Or how about USC which costs $50K per year? Janet Napolitano announced that next year UC will start offering 401K plans to new employees, so apparently she is someone who knows that db pensions are unsustainable.